Citation: 2010 TCC 173
Date: 20100325
Dockets: 2008-2477(IT)I
2008-2476(GST)I
BETWEEN:
MANUEL HENRIQUES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
McArthur J.
[1]
These appeals are from
a net worth assessment by the Minister of National Revenue (Minister) for the
taxation years 2003 and 2004 under the Income Tax Act (ITA) and
Part IX of the Excise Tax Act (ETA) relating to Goods and
Services Tax (GST), for the period January 1, 2003 to December 31, 2004. The
Minister submits that during the relevant period, the Appellant failed to
report income of $52,580 in 2003 and $39,510 in 2004 and did not collect and
report GST on all his revenues. He was also assessed interest and penalties.
[2]
The Minister’s
assessment, as a last resort, is a net worth based primarily on an analysis of
the Appellant’s and his spouse’s bank accounts. They challenged the Minister’s
accuracy and conclusions. The Appellant’s records lacked precision and his
accountant, who was retained for the purposes of the audit and the trial of these
appeals, had to resort to generalities and the memory and credibility of the
Appellant and his spouse, Maxine Zuniga.
[3]
The following is a
brief summary of those facts.
[4]
The Appellant emigrated
to Canada when he was 12 years old. He operated a
painting business, primarily painting residential homes, as a sole proprietor.
From time to time, he hired occasional labourers. He and Maxine deposited their
funds into three bank accounts as follows:
|
Deposits
|
2003
|
2004
|
|
Business Account
|
$139,558.35
|
$101,697.18
|
|
Personal Account
|
$70,028.84
|
$ 59,465.14
|
|
Mortgage Account
|
$15,715.00
|
$ 26,675.00
|
|
Total Deposits
|
$225,302.19
|
$187,837.32
|
[5]
For the 2003 taxation
year, the deposits totalled $225,302. The Minister, in its assessment, deducted
from that amount the Appellant’s reported income of $129,447 and also the amount
of $48,075 attributable to Maxine’s income and deposits that were not part of
the Appellant’s business income. The assessed amount was therefore $47,780 and
adding to that amount, $4,800 of unreported rental income, from a premises
located at 338 Saint Clarens Avenue, Toronto, Ontario, rented to the
Appellant’s brother-in-law, the Appellant’s total assessed income was $52,580.
[6]
For the 2004 taxation
year, the total deposits were $187,837. The Minister, in the assessment,
deducted from this amount the Appellant’s reported income of $77,630 and also
deducted an amount of $50,021, attributable to Maxine’s income and deposits. Also
deducted from the amount was a deposit of $26,675 to the Appellant’s mortgage
bank account, which the Minister failed to include in the Appellant’s income
assessment. The assessed amount was therefore $33,510 and adding $6,000 of
unreported rental income from the Saint Clarens Avenue
property, the Appellant’s total assessed income for 2004 was $39,510.
[7]
Counsel for the
Respondent referred to the decision in 620247 Ontario Ltd. v. Canada,
where at paragraph 8, Bowman J. stated the following, which is very helpful in
the appeals before me:
8 ... In a case of this type, which involves an attempt by
the Department of National Revenue to make a detailed reconstruction of the
taxpayer’s business, it is incumbent upon the taxpayer who challenges the
accuracy of the Department’s conclusions to do so with a reasonable degree of
specificity. That was not done here. A bald assertion that the sales could not
have been that high, or that some unspecified portion of the bank deposits came
from other sources is insufficient. I am left with the vague suspicion that the
chances are that the sales figures computed by the Minister may be somewhat
high, but within a range of indeterminate magnitude. This is simply not good
enough to justify the allowing of the appeal. If I sent the matter back for
reconsideration and reassessment the same evidentiary impasse would result. I
must therefore conclude that the appellant has failed to meet the onus of
showing that the assessment is wrong.
[8]
The Appellant has the
burden of reasonably establishing that the Minister’s conclusions are
incorrect. He has to analyze the bank deposits and establish, on a balance of
probabilities, that the deposits were not unreported business income. The
Minister’s arbitrary assessment is not much more than an educated guess, but it
is the best estimate of the Appellant’s income that was presented.
[9]
Ms. Zuniga worked in
2003 without declaring positive income. There is no discernable link between
her earnings and the Appellant’s deposits. Her evidence was not convincing. The
Appellant and Ms. Zuniga testified that they received payments in cash from her
father which came from overseas,
and $10,500 in cash from Patricio Zuniga (the Appellant’s brother-in-law) throughout
the year 2003.
[10]
I do not accept the
evidence of the Appellant and Maxine to the effect that her father gave them
$50,000 in cash in 2003 and $35,000 in cash in 2004. Exhibit R-3 purportedly
contains notarially witnessed and translated statements from Maxine’s father in
Puyo Canton Pastaza. I do not give these any weight. There is no corroborating
evidence such as conversion of the cash documentation if it is across
international borders, or direct evidence from the donor or the attesting
attorney. I do not accept that these amounts were transferred from Ecuador to Toronto without any trace of documentation. The declarations
state in part:
to my daughter Edith Maxine Zuniga Malo, who resides in 130 Hope,
St. PCM 6 and 1K1 Toronto City, Ontario State, Republic of Canada, I made her a
gift of thirty and five thousand dollars, in cash, in the years 2003 and 2004,
quantity that I obtained them partly of them received inheritance of my dead parents,
and part, of my long working years profits; equally I gave some securities to
my other children.
. . .
Sincerely
________________________
Mentor Zuniga
By this public instrument in a free and voluntarily way, on oath I
manifest that: I was the owner of a property of a piece of land and a two
floors cement house which is placed on 10 de Agosto and Francisco de Orellana
Street, of this Puyo City-Ecuador. I sold this house in 2003 for the value of
TWO HUNDRED THOUSAND AMERICAN DOLLARS, this currency I received on cash and
FIFTY THOUSAND DOLLARS I share with my daughter MAXINE ZUNIGA MALO and her
husband MANUEL ENRIQUES, this amount of money I lent them as a loan without
charging them any interest from this loan and about the TERM. They can pay me
according to their possibilities.
It is all what I can declare in honour of the truth and I am able to
ratify this whenever it can be necessary.
[11]
The Appellant’s agent
indicated in Exhibit R-3 that Anibal Zuniga (the Appellant’s father-in-law)
gave the Appellant or Maxine the following amounts:
a) 2003 May 26 $10,000
June 19 $10,000
November 3 $
6,000
b) 2004 May 7 $
2,000
November 22 $
7,000
These amounts cannot be reconciled with the $35,000
and $50,000 referred to earlier. There is no link between the father-in-law’s
stated cash and the deposits in the Appellant’s bank accounts. There is
evidence in the form of cancelled cheques for some amounts paid to the
Appellant or Maxine by Patricio Zuniga, Maxine’s brother. The total amount
of the cheques were deducted from the Appellant’s income.
[12]
The Appellant’s agent, accountant
Mr. Qureshil, did what he could with the dubious facts he had to deal with. He
acknowledged that the Appellant reported gross income of $139,000 in 2003 and
$169,000 in 2004. He stated “It is very simple. He borrowed $70,000 from
personal friends and $50,000 from his wife’s family and wife’s income.” He
added:
He is a small businessman. The gross is not the money he pocketed.
He had expenses and after expenses his net income is $25,000 or $30,000
depending on the year, which he has declared and filed.
Then you have a personal bank account. In the personal account that
is not unreported income, but it is actually money that is borrowed from
friends to buy the house, to renovate the house and to buy furniture that they
needed at the time. We gave enough proof to say warrant that claim that that is
not income. It is personal money and that is why it was deposited in the
personal account.
Then you have the mortgage bank account. Maxine worked in 2003 and
2004 and that money was deposited. In the first year she forgot and, when it
came to my attention, I made sure that that amount was included, so it was the
correct income. The government chose not to accept that.
[13]
The Appellant was a
sole proprietor but paid wages to his labourers of $64,000 and $36,000 in 2003
and 2004. There was no evidence of borrowing from friends.
[14]
Originally, Maxine
filed a nil tax return for 2003. This is not an act of forgetting. She testified
she worked in 2003 and 2004 in numerous cleaning jobs. However, she produced house
cleaning invoices,
all of which purportedly came from a Mr. Raftus. The Raftus invoices match the
deposits to the mortgage
bank account at Exhibit R-1, Tab 6.
[15]
In 2003, the Raftus
invoices from June 1, 2003 to December 31, 2003 total $15,715. When Mr. Qureshi
filed the income tax return for 2003 for Maxine, her net income was $10,800
after deducting $5,000 for cleaning supplies. However, cleaning supply costs
were already accounted for in the invoices. I doubt the authenticity of these
invoices. There are too many discrepancies. For example,
i) Maxine originally filed a nil
return for 2003.
ii) She testified that
in 2003 she worked at numerous homes. I understood for most of the year.
iii) During or after
the audit when she finally filed a tax return through Mr. Qurenshi, she
claimed $5,000 in expenses.
There is no rationale for the
discrepancies. I accept the conclusion of counsel for the Respondent, as
follows:
However, the total payments that were demonstrated in the bundle of
invoices at R-2 seem to match the deposits. One cannot explain way these
discrepancies. It is more probably that some of the money was collected in cash
and paid out, but we don’t know exactly what happened to it. There are too many
discrepancies to be able to reconcile and, more important for this case, I
submit that there are too many discrepancies to accept on a balance of
probabilities that she took that money and deposited it into this account and
that any of this money reflects her income as opposed to Mr. Henriques’ income.
This may seem like a harsh result, your honour, but I respectfully submit that
it is the only credible result in light of the uncertainty surrounding this matter.
[16]
Since the Appellant
failed to maintain proper records and also failed to meet the onus of showing
that the assessments were wrong, the appeals are dismissed.
Signed at Ottawa, Canada, this 25th day of March, 2010.
“C.H. McArthur”
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